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It’s no secret that being a department store is harder than it used to be. Before everything was available on a smartphone, it made sense that aggregating lots of products in one place would be a unique offering. With the way things are sold now, what should department stores do to compete?

Think small.

In the past, retailers talked about ever-increasing store sizes and broader arrays of products. The familiar refrain was, "If I had a bigger store, I could sell more stuff." That’s over. Having focused collections of relevant brands will motivate consumers. The idea of carrying primarily brands that are available worldwide is an old idea that offers very little to draw consumers in anymore.

Think risk.

In the past 20 years, retailers have tried to scale back their commitment to inventory purchases and when they do, they insist on guaranteed margins from vendors, and only committing to inventory that is certain to sell through to consumers. That makes stores homogeneous and boring. Retailers need to take chances to succeed now.

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What should they do specifically? The biggest thing is:

Department stores need exclusive brands and products.

You will say, that’s silly, department stores have been doing exclusive product and private label for a long time. Yes they have and they are doing it wrong. Historically, department stores curated products for the public. That worked well when so many things could not be found in most places. But that form of curation is now on every smartphone. Department stores should buy brands that they can control and open small specialty stores that sell only those brands in many other locations. The brands that stores need have to be exclusive but also have a life outside of department stores. The brands should be true brands and not phony private label products with a name on it. The distribution has to be limited to the department stores, the brand’s owned stores and the brand’s website and app.

The brands can’t be existing worldwide brands, Euro-luxury or faux-luxury brands; Gen Z consumers think those are fake and they’re right. They also can’t be brands that are available in places that the department store doesn’t own or control. The idea of carrying mostly big brands whose products are available in so many places is not interesting anymore, the brands need to appeal to millennials and Gen Z consumers. It might make sense in some cases to have the small specialty store attached to the department store but with a separate entrance to maintain identity. At the bottom of this article I list a number of such brands that would be interesting for stores and consumers.

The brands they buy have to have a defined identity in the market with a separate organization for design and marketing so that each brand can maintain its own unique identity. All these brands would have much higher margins than most of what’s sold in department stores today because the department store would get both the wholesale and retail profit margin.

This strategy will allow department stores to transition into centers of design and entertaining places to be rather than warehouses for large brands that are also available elsewhere. And then they will truly have exclusive products and they will appeal to the consumers they need. Department stores have to evolve into destinations to see and buy unique products and unique brands that are appealing to culturally-sensitive consumers. If they can do that, everyone else will follow and it won’t be because something’s on sale.

You will say that small brands aren’t known by consumers and that’s right. But if a big department store bought them and opened stores for them, small specialty stores, they’d get very well known in a short time and then they can be offered inside department stores. This strategy is also how big stores will transition into centers of design and entertaining places to be rather than warehouses for a large amount of brands available elsewhere. There’s no denying it’s a risk. But department stores are now in a very risky business and they have to take more chances to change the trajectory of their business.

As a consumer, wouldn’t you rather see unique brands than one more display of Coach, Michael Kors, Ralph Lauren or Hugo Boss? Wouldn’t you be more intrigued by brands that you couldn’t find anywhere else and have just a smattering of the bigger brands?

As a department store operator, wouldn’t you rather sell a brand you own that has twice the profit margin built into it than one that’s available at all your major competitors’ stores? You will say this is risky and that’s true, but if you don’t do this, then what’s your plan? Saks is spending $250 million to redo their New York flagship store. For less money, they could execute this entire plan over a period of years and have a unique company that offers products no one else has. Can spending $250 million to redo a store be better?

All this thinking requires a willingness to change and do things differently. I see department stores that can survive in the next ten years looking different from the way they look now. They will be filled with brands that are only available in their owned stores. The products will be relevant to how consumers want to present themselves. Department stores will think of themselves more as curators of space and every place a consumer stands will be interesting to look at or there will be an experience they can participate in (more about that in my next blog). Department stores need to keep changing until that happens. In the end, they may look more like boutique developers than the way stores look today.

It’s important that stores do this gradually. JC Penney proved that a new department store concept can’t be activated in one shot, consumers need to adjust and so do retailers. If a retailer commits to change and innovation, they can make it happen over time. But without being willing to give up their long-held beliefs about what should be on their floor, they will continue to weaken.

Here are some brands that I have visited with recently that I think are really interesting and could grow and be built into something very substantial:

Kari Traa – Here’s an active brand that is genuinely European and focused on women only. It has great sell-through but is not well known in the US. If a store invested in it, they could have independent Kari Traa stores as well as shops in their department stores. They could influence the way the product is designed and marketed for the US market.

Leota is a very young brand focused only on dresses for women, plus sizes, maternity and girls. It’s an all-new way of thinking about a product line. It screams to have its own stores and putting it in department stores and its own shops can work all over America.

Hatch Collection is a mostly maternity line but works well as everyday dressing as well. Like Leota, right now it’s almost only online. Owned by a department store and sold directly to consumers, like the other brands in this section, it would be a much higher-margin business than most of what the department stores are doing now.

Ministryis a men’s business that recently expanded into women’s. They have developed proprietary high-tech fabrics that look like casual apparel but function like activewear. They can be worn at work, to an after-work event, or on a bike to and from work.

Daniella Kallmeyer is an extremely small brand whose vision includes a selling environment that is more like a studio that rotates the scene every month or two. One month there would be a boudoir scene and another month there’d be a flower shop, an office and everything in the scene is buyable. This kind of presentation is very appealing to millennial and Gen Z consumer.

SOAK is a unique line of slide sandals with a proprietary cushion that is more comfortable than most offerings on the market. It is made in Maine and will appeal to the fashion-conscious consumer who finds Made in America appealing.

Kes NYC has two stores and performs very strongly in them, with good margins and great growth. I think of it as an updated, more current version of Eileen Fisher. The founder describes it as a brand that activates consumers’ intellect and femininity through design.

Ramy Brooksays they are a contemporary line offering luxurious, timeless, designer-quality styles with a sexy edge that is experiencing high growth and big opportunity. They have very strong social media marketing, great product and they resonate with a wide range of age demographics including millennial consumers.

In my next blog, I will discuss what kind of experiences consumers should have in the store of ten years from now and what kinds of software will help retailers create the right experience.

My firm, Triangle Capital LLC, does mergers, acquisitions and capital-raising for consumer-related businesses. If you're interested in that we should talk.